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re: When does it make sense, mathematically, to accelerate mortgage payments?
Posted on 12/7/23 at 12:38 pm to Asharad
Posted on 12/7/23 at 12:38 pm to Asharad
quote:
ay as much as you can. I turned my 30 year mortgage into an 11. After payoff, I started maxing out retirement savings and how have my first million in retirement. Any leftover cash after max contributions is for hellafun vacations.
1
Posted on 12/7/23 at 4:17 pm to Big Scrub TX
quote:and that is why you fail
Posted on 12/7/23 at 4:54 pm to baldona
quote:
Cash on hand is king over paying off any loan faster IMO.
But if you pay off the loan you'll have a lot more cash on hand because you've stopped making loan payments No?
Posted on 12/7/23 at 5:57 pm to PetroBabich
quote:Where did the cash from to pay off the loan?
But if you pay off the loan you'll have a lot more cash on hand because you've stopped making loan payments No?
Posted on 12/7/23 at 8:13 pm to Asharad
quote:Have you run the numbers to see how you would have fared if you had maxed out the 401 from the beginning instead of putting it toward your home?
and that is why you fail
Posted on 12/9/23 at 10:21 am to wiltznucs
quote:
The historic average for the S&P 500 is only 7-8%. So 6.5% is not too shabby.
Shouldn’t taxes be factored in?
That 8% return will be reduced by 24-37% to 5%-6%, right?
Posted on 12/9/23 at 11:47 am to rpg37
I think it depends on your age, and if you can get a return in the stock market that exceeds your mortgage rate...
Regarding the latter, paying extra principle in your case is essentially like investing the extra principle amount and making a 6.5% return...if you think you can do better than 6.5% in the stock market, you are better off doing that.
Regarding age, I just wouldn't want to have a bunch of years left on your mortgage as you approach retirement. Paying extra principle every month will reduce the time it will take to pay off the mortgage (as well as save you mortgage interest payouts over time).
Be that as it may, I would always make sure you have at least 6-12 months of emergency funds saved up...I would get that nest egg up before considering paying extra principle...
Regarding the latter, paying extra principle in your case is essentially like investing the extra principle amount and making a 6.5% return...if you think you can do better than 6.5% in the stock market, you are better off doing that.
Regarding age, I just wouldn't want to have a bunch of years left on your mortgage as you approach retirement. Paying extra principle every month will reduce the time it will take to pay off the mortgage (as well as save you mortgage interest payouts over time).
Be that as it may, I would always make sure you have at least 6-12 months of emergency funds saved up...I would get that nest egg up before considering paying extra principle...
This post was edited on 12/9/23 at 11:50 am
Posted on 12/9/23 at 12:07 pm to Chicken
quote:
...if you think you can do better than 6.5% in the stock market, you are better off doing that.
Why wouldn’t it be =6.5%/(1-your highest marginal tax rate)
You pay principal with post tax dollars, so wouldn’t you need 8.5% or more return to compare?
Posted on 12/9/23 at 12:26 pm to Kujo
quote:
Why wouldn’t it be =6.5%/(1-your highest marginal tax rate)
Correct that tax MAY be part of the calculation depending on when you sell. It is feasible to pay a very low tax rate if effective tax planning into retirement when income goes away.
Posted on 12/9/23 at 12:54 pm to lynxcat
Seems like the "Pay off early" camp puts huge amounts of extra principal into their mortgage payments.
I put a small modest amount of extra principal. Nothing crazy, $85-$200 extra each month. It's something I don't miss. I know it is doing some good without breaking the bank.
I put a small modest amount of extra principal. Nothing crazy, $85-$200 extra each month. It's something I don't miss. I know it is doing some good without breaking the bank.
Posted on 12/9/23 at 1:06 pm to 3D
I'd like to see the comparison on paying off a 30 year mortgage in say 15 years, and putting say double the amount into a 401k for the remaining 15 years. Or putting a set amount into A 401k and paying the 30 year off per the schedule.
Posted on 12/9/23 at 1:15 pm to lynxcat
quote:
Correct that tax MAY be part of the calculation depending on when you sell. It is feasible to pay a very low tax rate if effective tax planning into retirement when income goes away.
Is this entirely correct if you factor in how mortgage interest is amortized?
“Tax deferred”, drops you to 22% tax rate, not a huge difference, and you would only be paying the remaining principal balance, most of the interest is already paid so you’re not avoiding/reducing interest.
You’d still have to out pace your interest by 22%.
I’m not financial advisor/expert.
Can anyone run the numbers for “Net” assets at the end of 30 years.
$1M mortgage at 5% (for ease of calculation)
$200K household income.
Scenario A: Pay $2K/month extra on mortgage, when mortgage paid off, $2k + mortgage payment into tax free instrument at 3% until total time is 30 years from mortgage start date.
Scenario B: put 2k each month at 8.5% guaranteed return for 30 years, then at 30 years, reduce that amount by 22-25% for taxes.
How much money did you pay in total for your home (principal & interest) and how much is in your bank account?
Probably have to factor in mortgage interest, tax deduction, but being that the standard deduction has increased so much, I’m not finding that it’s not much of a savings. (Unless you’re self-employed, liar)
Posted on 12/11/23 at 1:30 pm to rpg37
My strategy to pay my mortgage early would be to not pay any extra towards the mortgage. Instead, invest any extra payments into an index fund. Once you have enough in the index fund to lump sum the rest of the mortgage, you'd pay off the rest of the mortgage at that time.
Posted on 12/11/23 at 9:12 pm to jamiegla1
quote:
I feel like the whole "which is the most efficient way to spend my money" question is bullshite 95% of the time. How many people do you know that actually invest the money they dont spend on paying off lower interest loans in something that makes more money? I think nearly everyone just spends that money immediately or puts it in a rainy day fund where it makes almost nothing
It’s not that difficult in this market to get into a mmf or even a simple high interest rate savings account and out perform an old sub 4% mtg interest rate.
Posted on 12/13/23 at 6:36 am to PetroBabich
quote:
But if you pay off the loan you'll have a lot more cash on hand because you've stopped making loan payments No?
I never said don’t pay it off. I said don’t pay the bank until you have enough to pay it off. As said put it into a bank account like a money market and earn interest and then when you have enough do a lump sum.
If you move or sell for example, it’s sure as hell nice to have the money in cash to put to the new home, rather then have more of your old mortgage paid off that you have to loan out or sell off in order to acquire.
At the end of the day living within your means and having a plan to pay off your mortgage and not continue it forever is a great financial plan, there’s really no bad plan just a good and better option.
Posted on 12/13/23 at 7:32 am to lynxcat
+1. I don’t see enough mention of the taxes and insurance in these types of discussions. The fact that that doesn’t go away really defeats any perceived emotional benefit that pay-off provides to me.
Posted on 12/13/23 at 8:02 am to rpg37
The biggest fallacy of this in my opinion is how rarely does one stay in the same house for the 30 years of the mortgage? I designed and built my “forever” house and am on my 3rd since. Paid off my first in 13 years and haven’t had a mortgage since then.
Thats the key, do you build equity faster by accelerating the payments is the real question for most.
Thats the key, do you build equity faster by accelerating the payments is the real question for most.
Posted on 12/13/23 at 8:09 am to rpg37
quote:
take advantage of the interest deduction in April,
Are you sure you don’t get the standard?
Posted on 12/13/23 at 9:36 am to turkish
The point is the fact that you have an ability to pay off your house is a great resource for you. Even bonus if you have it in an account making you money. Not everyone has that opportunity available at least not currently whether it is for their own fault or not so when your instance, yes, whatever you were doing seems to be working. But I doubt you have your money making over 13% at least not over 30 years which is what this person is asking.
Posted on 12/13/23 at 11:59 am to llfshoals
quote:I mean, by definition, you build equity in the home faster if you accelerate the amortization.
Thats the key, do you build equity faster by accelerating the payments is the real question for most.
The relevant question is do you build overall net worth faster by doing such? (i.e. what is the opportunity cost of doing such?)
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